Caution: Illinois’ Three Headed Tax Monster Approaches

John is the Budget & Tax Legislative Specialist for The Heartland Institute. Prior to joining Heartland he was the National Press Coordinator for Americans for Fair Taxation, one of largest grassroots tax reform organizations in the country. His commentaries have appeared in publications such as the Chicago Tribune, Milwaukee Journal Sentinel, Detroit News, Chicago Sun-Times, Investor's Business Daily, and American Spectator Online.

Earlier today the Illinois legislature voted to implement an “Amazon” tax which places a 6.25% sales tax on purchases from retailers that have affiliates located within the state.

Hours later Gov. Pat Quinn and top Democratic leaders apparently reached an agreement to also raise the state’s income tax by 75-percent and more than double the state’s cigarette tax. Taxpayers shouldn’t worry too much however since the income tax hike portion will purportedly only be “temporary” (insert sarcasm).

Each of these three hikes would produce significant negative effects for Illinois taxpayers as well as local businesses.

The most egregious of these tax hikes would be raising the states flat 3 percent income tax up to 5.25 percent. Currently this is one of the most competitive aspects of Illinois’ business climate. Raising the rate by 75 percent would sacrifice one of its only relative tax advantages. This is comparable to tying a cinder block to the ankles of a person already struggling to keep afloat.

A $1 per pack cigarette tax hike would make Illinois’ per-pack tax nearly 12 times that of neighboring state’s Missouri and would inevitably lead to a significant amount of cross border purchasing and smuggling. Additionally cigarette taxes are highly regressive and a very unreliable source of revenue.

The Illinois “Amazon” tax will force out-of-state online retailers to collect sales and use taxes for sales generated through the retailers’ in-state affiliates even if the firm does not have a physical presence in the state. As a result Amazon has already sent around emails to members of their affiliates program expressing regret that once signed into law Amazon will have to end its relationships with these small entrepreneurs.

Each of these tax hikes will only serve to prop up an increasingly unsustainable level of government spending. The state’s budget morass will continue get worse as a result of destructive tax policy such as this. In today’s global economy, businesses and capital is able mobilize and relocate quicker and more easily than ever before. As a result these changes in regulations and increases in tax burden will have significant negative effects on the state’s economy.

Illinois should instead be focusing their attention toward real reforms that would put the state on solid fiscal ground, including comprehensive tax and expenditure spending limits and reform of the state’s toxic public pension system. Those two reforms alone would go a long way towards helping to keep government spending to a reasonable, sustainable level and allow the state’s economy to recover. One thing we must all keep in mind is that most economically friendly way to balance a budget is to grow the size of the private sector and restrain spending. Illinois is looking to do just the opposite.

Caution: Illinois’ Three Headed Tax Monster Approaches was last modified: January 7th, 2011 by John Nothdurft